When we talk about businesses going public, there are always risks and challenges involved which are uncertain and can create problematic disruptions if one remains unprepared. Hence, IPO readiness is of utmost importance because, as a public company, one is subjected to numerous rules, regulations and standards for one to be abreast of. And as the landscape of IPO becomes more dynamic, let’s look into the intricacies on how businesses can prepare to get listed while carrying out subsequent changes.
Preparing for an IPO involves financial discipline, corporate governance, and readiness. However, the foremost step that would define the whole process is identifying and engaging with the right advisors, including bankers, financial advisors, underwriters, and legal counsel, at least one to two years before the IPO. Now firstly coming to financial discipline, it goes beyond compliance and accurate accounting and includes monthly and quarterly book closure, regular audits, quarterly filings, system readiness, and establishing internal controls. Companies must start these practices early, as delaying changes until just before or after the IPO is ineffective.
Secondly, if we speak of corporate governance, it also extends beyond compliance and audits to include robust governance practices, board and management oversight, and promoting transparency and accountability. Companies aiming for a successful IPO should implement governance practices a year in advance, including holding quarterly board and committee meetings. This helps companies get accustomed to the rhythm of setting up meetings and driving resolutions, which is essential post-IPO.
And thirdly, the timing and readiness are also critical which require in-depth strategy based on market conditions and comprehensive preparation across all aspects of the company. Hence, timing the IPO is critical; even with thorough preparation, success depends on market conditions, industry trends, and investor interest.
Preparing for an IPO involves financial discipline, corporate governance, and timing and readiness. However, the foremost step that would define the whole process is identifying and engaging with the right advisors well in advance.
Getting Oneself Prepared Beforehand
Furthermore, Ramani Dathi highlights the importance of early preparation for an IPO, especially in setting up a board in compliance with SEBI requirements. This process should begin at least a year before filing for an IPO. Moreover, identifying the right directors, including independent and nominee directors, is crucial because independent directors bring external perspectives and drive critical operations such as risk management, audit, and nomination and remuneration committees. These committees are recommended to be chaired by independent directors, rather than executives.
Moreover, companies should generate appropriate investor interest well before the Initial Public Offering, ideally maintaining continuous engagement with institutional investors from time to time. This long running relationship helps investors understand the business model and fosters transparency and trust, contributing to a successful IPO.
As mentioned above, Ramani Dathi underscores the importance of selecting the right financial advisors, underwriters, and legal counsel for a successful IPO. When choosing financial advisors, companies often prioritize the reputation and credibility of top firms, typically the big four, due to their capability to handle IPO complexities. Financial advisors require 12 to 24 months to conduct end-to-end due diligence, restate financials, and consult with state exchanges. Selecting advisors with recent experience in the industry is vital, as it ensures they understand the sector and its nuances. Moreover, accessibility and availability of senior partners are crucial, as their expertise and timely recommendations can significantly impact the IPO process.
For underwriters and bankers, credibility, network distribution, and reach to investors are essential. Evaluating their recent IPO performance, including subscription levels and the quality of investors, is important. The right investors, such as long-term institutional investors, contribute to the IPO's success. A broad reach might involve engaging multiple bankers.
Legal counsel selection for an IPO mandates at least one international advisor to meet the diverse needs of foreign institutional investors, enhancing global compliance and credibility. Here, evaluating advisors' capacity to handle the IPO's size and complexity is crucial; those suited for smaller offerings may not manage larger, intricate ones effectively. And before going public, companies must comply with key regulations like the Companies Act, SEBI guidelines, RBI regulations, and listing requirements of BSE or NSE, including securing necessary stock exchange agreements. Also, it is important to note that restating financial statements for the past five years, particularly after mergers or acquisitions, demands extensive effort, consultations, and expert opinions to adjust for exceptional items and prior adjustments. Adding to this, maintaining an ongoing dialogue with SEBI and stock exchanges ensures timely compliance.
Preparing for quarterly result disclosures post-IPO involves comprehensive transparency and adherence to guidance policies. In this juncture, CFOs play a critical role in ensuring consistent communication, avoiding selective disclosures, and preventing insider trading or compliance lapses.
A Wind of Change
Furthermore, an IPO triggers significant changes in a company's structure and culture, necessitating strategic management. Structural shifts begin with the introduction of independent directors, specialized committees, information architecture , ensuring robust governance and compliance. Compliance requirements intensify post-IPO, demanding meticulous quarterly filings overseen by an internal secretarial team.
Also, listed firms must establish strong internal frameworks, distinct from the reliance on external support common in private companies. This involves setting up efficient secretarial and compliance teams that collaborate closely with the board, CFO, and departments to enforce rigorous internal controls and conduct regular audits.
Cultural transformation centers on promoting governance, financial prudence, and transparency. Transparency is critical here which requires quarterly disclosures of financial results, strategic plans, M&A activities, geographic expansions, and diversification efforts. Also here, educating leadership on insider trading and communication protocols during quiet periods ensures compliance. Navigating these changes effectively hinges on upholding high corporate governance standards, financial discipline, and retaining talent, essential for sustained growth post-IPO.
Building Strong Relations
Best practices for establishing and maintaining strong investor relations involve proactive and strategic communication directly from the CFO office and executive management. While some believe that investor relations can be outsourced to an IR agency, it is crucial for the company's leadership to handle this aspect. Effective investor relations are about communicating the long-term objectives and strategy of the company, not just providing data or answering queries.
The IR team or consultant can handle routine data-related questions and updates, but the executive management and CFO must engage directly with investors on long-term strategy, capital allocation plans, and maintaining relationships with large institutional investors. This engagement should be proactive, using forums like investor conferences to communicate the company’s performance, future focus areas, and industry outlook. Additionally, it's important to build strong connections with potential investors, not just existing ones. This ensures a broader base of interested investors who are well-informed about the company's business model and potential, ready to engage when opportunities arise.
So to conclude, predictability is key for sustaining investor confidence post-IPO. Public investors expect a predictable business model and consistent performance. Communicating long-term strategy and business performance clearly, and addressing potential bad news proactively, helps maintain trust. Minimizing non-recurring items, adjustments, and surprises in financial reports is crucial for ensuring predictability and sustaining investor confidence.
About the Author
Ramani Dathi, CFO at TeamLease Services Limited (one of India’s largest manpower supply companies with over 3 lakh employees and Rs.9,000 Crore annual turnover) brings 20 years of experience covering both Big4 consulting firms and industry. She is currently associated with TeamLease Services Limited, one of India’s largest manpower supply companies with over 3 lakh employees and Rs.9,000 Crore annual turnover. Prior to joining TeamLease in 2014, she worked for Deloitte and Price Waterhouse Coopers in audit and assurance services. During her tenure with Big4s, she audited large clients like NCR, Accenture, Warnaco, BE Aerospace and Honeywell. She is also an All-India rank holder in both CA and CWA.
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